Nat cat exposures: the changing landscape in Asia

Last year will be remembered for many things: the year of the cyber attack, the disasters of Malaysia Airlines, the rise of ISIS and the ebola outbreak in Africa, to name a few.

But it will also go down in history as the year to date with more natural catastrophes than any other: in 2014, some 189 events were recorded, according to a new report from Swiss Re.

Globally more than 7,000 people were killed or went missing in natural disasters, with the majority in earthquakes, floods and other severe weather events. And the damage bill topped $110bn.

Asia was hardest hit in terms of human loss.

An earthquake in Yunnan, China, in August caused the most loss of life: at least 731 people died or went missing.

Monsoon flooding in the state of Jammu and Kashmir in India and nearby regions of Pakistan claimed 665 lives.

Freezing conditions also took their toll. According to official statistics, there were 505 deaths in Peru, mainly of children and the elderly due to very low temperatures.

Elsewhere, many people died in flooding and landslides in Afghanistan, Nepal and Sri Lanka.

The Asia-Pacific region also suffered the most loss of life relative to others for the previous two years.

It also has seven of the 15 top countries with societies most at risk to extreme natural events, according to the United Nations University for Environment and Human Security WorldRiskIndex.

Tom Larsen, product architect at data analytics firm CoreLogic, has identified three key trends behind the increase in damage caused by natural catastrophes, particularly in the Asia-Pacific region.

1. Population growth

As the world’s population increases, it stands to reason that more damage will be caused by natural catastrophes, in terms of human impact. The planet’s population is currently growing at slightly more than 1% per year. But Larsen says this relatively low global rate is misleading.

“China, Western Europe and North America are lower than the global average and the increasing populations outside these areas will naturally increase the severity and frequency of catastrophe losses,” says Larsen.

2. The wealth effect

The world’s population isn’t just increasing, it’s growing wealthier. The Asia-Pacific region, in particular, has experienced a huge increase in wealth, led by China.

Larsen says GDP is a coarse but useful proxy for estimating wealth.

Globally, GDP in the past four years has averaged more than 3% per year growth, a rate that could lead to a doubling of GDP in about 25 years, according to the CIA World Factbook.

“We’re seeing it in the insurance take-up figures. For typhoon Haiyan in the Philippines, we saw a $1.5bn loss. A loss of this severity in the Philippines was viewed as impossible only a few years ago; today, this level of loss must be viewed as plausible and foreseeable,” says Larson.

3. Population shift towards hazard prone areas

“The habits of humanity are moving towards concentration. For example, 60% of the population in China is concentrated in the 12 coastal provinces, a pattern repeated in many other countries,” says Larsen.

As Larsen points out, the Asia-Pacific region is one of the most extreme areas of urbanization in the world. Seven out of the 10 largest cities are located in the region.

“Greater concentration means you have a higher probability of not getting a direct hit, but if you get one, you’ll see a much higher loss,” says Larsen.

Climate change

The region is also facing exacerbated disaster risks because of global climate change.

By 2050, the UN Office for Disaster Risk Reduction estimates 40% of the global population will be living in river basins that experience severe water stress, particularly in Africa and Asia.

Underdevelopment

Much of Asia-Pacific is also still considered part of the developing world.

It’s therefore not surprising that the amount of analysis and modeling available is sometimes incomplete.

Lockton Singapore chief executive Peter Jackson highlights some examples.

“They are still flood mapping China for example. In Indonesia, it’s highly volcanic, but they still don’t understand what a 50-year event is, as opposed to a 100-year event or a 500-year event.

“Whilst the implications of a quake in California are pretty well known to insurers, the many potential quake and tsunami zones in Asia are less understood with incomplete available data.”

He points out, while firms should take heed of local regulations, they often need to go beyond them.

“Building specifications will often need to be stronger than local regulations, you need to set your own standards.”

The ‘cold spot’ epiphany

What all of this means is that Asia-Pacific has a perilous risk horizon.

Despite this, the severity of losses in the region continue to surprise global reinsurance and financial markets.

Larsen says areas outside of Europe and North America used to be viewed as “cold spots” or areas with the potential for only regional-scale losses. But that’s changing.

“The cold spot epiphany is that there are no longer any cold spots, and all regions require dynamic and granular catastrophe exposure management.

“It goes back to those trends, population growth, the wealth effect and movement. Many economies have greatly improved in the past 10 years, and the scale of the improvement is faster than the frequency of these (nat cat) events.

“It’s driving a shift towards more analytic based, rational, granular modelling,” says Larsen.